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Unlock the secrets of Home Loan financing
1. What are the components that constitute a loan EMI?
Correct option is C - The EMI is a fixed amount that you pay the bank every month, against your loan. It constitutes repayment towards the principal amount as well as the interest amount. For most loans, in the initial period, the repayment towards the interest constitutes the larger share of the EMI, while towards the latter part of the loan, the repayment towards the principal constitutes the larger share of the loan. If you increase your loan tenure, your monthly EMI will be lower and vice-versa. But remember that over a longer tenure, you end up paying a higher interest amount over the entire loan tenure. By keeping your EMI high, you can save on the total interest outgo.
2. What factors do banks look at when approving a home loan?
Correct option is D - A home loan is a big-ticket and long-term loan. Hence, before approving it banks do thorough due diligence. They check whether the borrower can repay the loan over the entire loan period, whether the builder can deliver the property within the time deadline mentioned (in the case of new properties) and whether the property is pledged with any other lender (in the case of old properties).
3. What is a moratorium in a loan?
Correct option is B - The moratorium is a period when the loan is disbursed but the repayment has not started. It is commonly offered in the case of education loans. The idea is to give students a grace period to find a job and start earning, after which they can start repaying. Sometimes moratoriums are announced for other types of loans, in case of unusual circumstances. For example, in India, during the Covid lockdown, the government announced a moratorium on retail loans to help those who had lost their jobs and were unable to pay the EMIs.
4. What are the differences between a fixed-rate and a floating-rate loan?
Correct option is C - A fixed-rate loan offers the same interest rate during the entire loan tenure, while in the case of a floating-rate loan, the interest rate is reset each time the RBI changes the repo rates. So, you may find your loan EMI changing several times during the entire loan tenure. Due to this feature, i.e. the option of locking into the rates, the interest rate on a fixed rate loan is generally higher than a floating rate loan. Longer-term loans, such as home loans, generally have the option of floating interest rates. In the case of short-term loans, such as auto loans or personal loans, the interest rate is usually fixed.
5. What is difference between a delinquent loan and a default loan?
Correct option is A -A delinquent loan is when the borrower misses the EMI once. It becomes default if the borrower misses the EMI repeatedly. Default and delinquency both essentially mean the same thing. The difference is in the time for how long the loan repayment is not done. A loan is classified as delinquent if the EMI is delayed once. But if the delay persists and several EMIS are missed, then the loan is classified as delinquent.
6. What is the meaning of default with regard to a loan?
Correct option is B - If you fail to pay your loan EMI or credit card balance by the due date, it is classified as a default. This can lead to a fall in your credit score. In the case of credit card payments, you can pay the minimum amount due if not the total amount due and avoid the default. But this option may not be available in case of loans where the EMI is fixed. If you don’t pay your EMI by the due date, in some cases banks may first classify your loan as delinquent before classifying it as a default.
7. What does APR stand for?
Correct option is C - The Annual Percentage Rate is the total cost of your loan, every year, expressed in percentage terms. It includes the annual interest rate plus any additional fee. It indicates how much you need to pay for your loan. Hence, check the APR while borrowing and not only the interest rate on your loan.
8. What is collateral in a loan?
Correct option is A - A collateral is a physical or financial asset that you can pledge with the bank as a security for borrowing money. It can be property – residential or commercial, land, car, two-wheeler, gold jewellery or coins, share certificates, life insurance policy documents, bonds or debentures, etc. The bank will value the asset and approve the loan amount based on the valuation. Banks have fixed rules regarding how much the loan amount should be as a percentage of the asset’s value. By offering a collateral you can get a loan at a lower interest rate.
9. What is an unsecured loan?
Correct option is C - A loan that is extended without any collateral or security is called an unsecured loan. These loans are given based on various factors including your credit score and credit history. In fact, without a decent credit score, you may not be able to get an unsecured loan. Personal loans and loans against credit cards are the most common examples of unsecured loans
10. What is a secured loan?
Correct option is C - When you pledge a physical or financial asset with a lender, i.e., a bank or a non-banking financial company for borrowing, it is called a secured loan. The types of secured loans are home loans, mortgages, auto loans, gold loans, loans against shares/mutual funds/life insurance policies/bonds, etc. Generally, the interest rate for a secured loan is lower because it is a less risky loan for the lender. In case the borrower does not repay, the lender can sell the collateral, i.e., the pledged asset, to raise funds and settle the loan.
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